Miners Calibrate the Costs of Operating in Lawless Lands

The Democratic Republic of the Congo is famously rich in mineral deposits. It is also notorious for destitution, corruption, sectarian violence, child soldiers and atrocities. Last November, election violence forced African Metals TSXV:AFR to evacuate expatriate personnel constructing its Luisha South Copper-Cobalt Property in Katanga Province. The workers have since returned following the re-election of Joseph Kabila, although his record of expropriation can hardly be reassuring to miners. Luisha’s plant is slated for production early this year.

Last October, in South Kivu Province, on the DRC’s eastern border with Tanzania, Burundi and Rwanda, Banro Corp TSX:BAA opened the country’s first gold mine in 50 years. Banro plans to use cash flow from the Twangiza Mine to open a second operation within 18 months, the Namoya Gold Mine in Maniema Province, immediately east of South Kivu.

Both provinces have suffered some of the country’s worst atrocities, including mass rapes by soldiers. However, Banro IR Manager Naomi Nemeth emphasizes, “We are not one of the pockets of disturbances that you do see in the northeast. The area that we’re in, having no incidents over the last however-many years, is not a concern. We have successfully built a mine, gotten it into production and built a road to it with no incidents. I don’t think we would expect them to start at this point.

“We have the same level of security there that we’d have anywhere,” she continues. “We don’t have anything over and above what we’ve always had during construction and early production. We hire a mine security service; they’re a Congo firm.”

Security is just one approach. Like Gran Colombia TSX:GCM and other companies, Banro also employs a hearts-and-minds strategy. Since 2005, its registered charity, the Banro Foundation, has built schools for 3,300 students, promoted adult literacy, funded a women’s health centre and provided infrastructure, including a hydroelectricity rehabilitation project.

Alex van Hoeken has worked in the DRC for 12 years. Now President/CEO of Kilo Goldmines TSXV:KGL, he says, “I know my way around; I’ve got my network; my wife is a lawyer there. I’m quite comfortable. It’s not the easiest place to work, but if you know your way around, it’s doable.”

Kilo holds a 71.25% interest in the Somituri Gold Project, with the remainder held by local companies. The drilling program takes place in Orientale Province, bordering the Central African Republic, South Sudan and Uganda in the DRC’s northeast corner.

Kilo’s DRC work has just received a vote of confidence from Rio Tinto, a joint-venture partner along with Suez Holdings Ltd, in the Isiro Iron Ore Project, also in Orientale Province. Last December, Rio acquired a 15% interest from Suez and, one year ahead of schedule, made an option payment to Kilo of US$1.43 million. “The fact that Rio has purchased the option from the local partner and given us the accelerated payment just means that the project is on track and highly prospective,” says van Hoeken.

Apparently unfazed by any frying-pan-to-the-fire comparisons, van Hoeken has gone from the DRC to Afghanistan. As part of a group led by financier David Buckle, van Hoeken is now negotiating with the Afghan Ministry of Mines for rights in the Hajigak Iron Ore Deposit. If the bid is successful, Kilo will hold a 20% interest in a new company created to develop the deposit, located in Bamyan Province, 130 kilometres west of Kabul.

“We’ll be working with locals for security,” van Hoeken explains in an interview from the Afghan capital. “The province where the project is located is considered one of the safest in the country. The need for security probably won’t be as high as you might think.”

This Buckle-led bid concerns one of four Hajigak concessions. A group of Indian state-run and private companies has dibs on the other three. They’re among the trailblazers of what could be a huge minerals rush, danger or no danger. The country has a potential treasure chest of iron, copper, cobalt, gold, lithium and rare earths worth up to $1 trillion, an oft-repeated number first reported in June 2010 by the New York Times, which attributed it to “senior American government officials.”

According to the Afghanistan Support Investment Agency, “The mining sector is crucial to the reconstruction and rehabilitation of Afghanistan.” A government website states, “The country is much less risky than the media portray. Insurgent activities are restricted to limited pockets of the country.” Even so, the Ministry of the Interior has a 1,500-person Mines Protection Unit guarding the Aynak Copper Mine, a $4-billion exploration project operated by China Metallurgical Group and Jiangxi Copper 560 kilometres south of Kabul. To guard future projects, Afghanistan plans to increase its specialized security unit to 7,000 people.

Another omen concerning the possible future of mining companies operating in dangerous lands was revealed January 3, when Afghan police arrested four employees of the Montreal security company GardaWorld, which offers a range of services including risk analysis and protection. The employees were caught in a vehicle with 30 unlicensed AK-47s. That same day the company issued a statement: “They were taking the weapons to be tested at a firing range before being purchased and properly licensed by GardaWorld.”

You have to look at the potential value of a deposit. In other words, a very large deposit might justify investment in a riskier jurisdiction if the price was right —Brien Lundin

Brien Lundin, President/CEO of Jefferson Financial, editor of the Gold Newsletter and host of the New Orleans Investment Conference, agrees that crime, violence and social unrest increasingly threaten mineral resource companies. “I think some ways to mitigate risk are to build community support through community relations efforts that are typically not very expensive in the grand scheme of things. But from a purely political standpoint, there’s not a lot a company can do to alter the risk in any particular area.”

From an investor’s standpoint, he says, “You have to look at the potential value of a deposit. In other words, a very large deposit might justify investment in a riskier jurisdiction if the price was right. So there is a value argument to be made there. You’re willing to take greater risk in riskier places for a potentially greater reward. There isn’t an absolute either way. There are a lot of factors that need to be brought into the equation.

“One of the ways an investor can get a relative idea of the risk in any particular regime is through the Index of Economic Freedom, compiled by the Heritage Foundation and the Wall Street Journal,” Lundin says. “The Fraser Institute started this years ago. That has a numerical ranking of every country in the world. I find it’s a fairly good barometer of investment risk. It encompasses ease of doing business in various regimes and also rule of law.”

Is the rule of law threatened only in distant countries? Last November, Taseko Mines TSX:TKO applied for an injunction to prevent aboriginal protestors from blocking the road to its New Prosperity Gold-Copper Project in south-central British Columbia. The company played a video in court showing Marilyn Baptiste, chief of the 400-member Xeni Gwet’in Band, telling a Taseko employee, “The provincial government does not have authority in our territory.”

The Taseko employee responded, “Well, we’ve been asked to come and conduct an exploration drilling program there…. We’re not aware of anything that would stop us from going about this work.”

Baptiste countered, “You do not have our authorization to be into our territory.”

He showed her some papers and declared, “We have a permit, as I’m sure you’ve received a copy of this.”

She responded, “As I advised, BC has no authority.”

He reiterated, “We intend to continue here because we have a permit, and this is a public road.”

“As I advised, your permit does not have any authority on our territory. BC does not have authority in our territory.”

“Unfortunately, we do have a permit, and we believe we’re going about our legal work.”

“We have not authorized you to be in our territory.”

Eventually, he asked, “We wish to bring our equipment out here. Will it be safe?”

“It will not be safe. I cannot guarantee your safety or anything’s safety, anybody’s safety, because as I said you do not have authority to be on our territory.”

In December, the BC Supreme Court turned down Taseko’s application. Instead, it granted the Xeni Gwet’in an injunction to stop the exploration project. The injunction remains while the band applies for a judicial review of the exploration permits.